How Will We Feel The Pain?

It’s been quite a party. But the hangover might be a doozy. After four straight years of trillion-dollar annual budget deficits, the news is dawning on all political parties that the federal budget is long due for serious repair, and that less spending is part of the process. As a state that historically has gotten $1.50 back for every dollar it sends to Washington, what does that future bode for Montana? Will our pain be more or less than other regions?

It is not just communities like Great Falls, home to Malmstrom Air Force Base, where the federal government presence in our state is felt. Federal agencies like the Forest Service, BLM and Customs and Border Patrol provide some of the best paying jobs in Montana’s many smaller communities. Not to mention the veterans facilities, tribal governments and even Medicare and Social Security recipients with a stake in the federal government’s future path.

Talk of budget pain in Washington has been subdued in recent months, but this is illusory. Economic growth has closed this year’s federal budget deficit, just as has happened in the recoveries from previous recessions. But, believe it or not, the ups and downs of deficits as the economy contracts and grows is not the problem that needs fixing. It is the fundamental imbalance between spending on entitlements now upon us as baby boomers retire, on the one hand, and the tax burden on what will be a relatively smaller working population, on the other.

We’re not smart enough to predict how and when precisely that imbalance will be addressed. But as forecasters we know that it has to be. And so as we prepare our predictions for the Montana economy as part of the Chamber’s Economic Update program, we must consider how a lower trajectory of federal government spending would play out in a state economy that has traditionally punched above its weight in attracting federal funds.

In fact, we’re already been seeing declines in government spending at all levels in Montana. The total payroll of federal workers in Montana has declined by about 6 percent, inflation-corrected, over the past two years. But those declines are largely a wind-down from the stimulus-related increases of similar magnitude in the two years prior to that. A change in the overall path of the federal government’s presence in Montana hasn’t happened yet.

But the news on the private sector economy remains remarkably upbeat, with double-digit growth in income tax receipts in Helena persisting right through the year’s midway point. It’s too early to be sure, but the evidence points to a strengthening in business proprietor income, related in part to construction and energy activity, as a main cause. All in all, our forecast of accelerating activity in Montana’s economy that we made at the beginning of this year is holding true.

Patrick Barkey is director of the Bureau for Business and Economic Research at the University of Montana. He is speaking on “Montana’s Federal Economic Footprint: The Local Impact of Changes in Washington” at the Montana Chamber Foundation's Midyear Economic Update series. More details: http://www.bber.umt.edu or 406-243-5113.